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Productivity of Rural Credit: A Review of Issues and some Recent Literature M S Sriram Indian Institute of Management Ahmedabad.

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Presentation on theme: "Productivity of Rural Credit: A Review of Issues and some Recent Literature M S Sriram Indian Institute of Management Ahmedabad."— Presentation transcript:

1 Productivity of Rural Credit: A Review of Issues and some Recent Literature M S Sriram Indian Institute of Management Ahmedabad

2 Introduction Policy Assumptions: –The most significant policy intervention has to be made in agriculture in rural India –Credit is important and has a causal relation with productivity – both in agriculture and non farm sectors –Opening up the supply of credit is desirable –Cost of credit is critical and needs to be regulated

3 Causality is elusive Credit is a sub component of inputs that go into agriculture Data on credit is available largely for the formal segment Diversity across crops, regions and practices makes it difficult to undertake such an exercise on a nationwide basis

4 Recent Literature Burgess and Pandey: –Opening of bank branches in unbanked areas [and thus increased supply of formal credit] has helped to reduce poverty. –Impacts on poverty might have come from non- agricultural sector –No evidence of elite capture with bank loans agricultural loans disbursed across all land holding segments prior to 90s –Microfinance has not been successful in reaching real backward areas

5 Recent literature Vaidyanathan: –Increased credit supply [indebtedness] may not lead to increase in agricultural productivity –Private capital formation without concurrent effect on economics of agriculture is worrying –If credit is not appropriately directed, it might lead to deep indebtedness and distress –Focus on public capital formation and infrastructure to address the problem of productivity

6 Recent literature Rakesh Mohan: –Growth in formal agricultural credit has slowed down, but should not be a cause for worry –Credit to be seen more as a proportion of Agricultural GDP that as a proportion of overall supply of credit

7 Is there increase in value of output? Is credit the reason? Gross Value of Output, Value of Input and Short-Term Credit (Rs crore at current prices) Year Gross Value of Output Value of Input Short Term Credit Short Term Credit as a percentage of Value of input as a percentage of Outputs InputsOutputs % % % % % % % Source: National Account Statistics 2005, [reproduced from Mohan, 2006] Handbook of Statistics on the Indian Economy , RBI.

8 Is Agriculture Profitable? Not very profitable in general Profitability figures vary widely across states Income from cultivation Rs.949 per month across the country States like Jharkhand, Kerala, TN, WB and Rajasthan report greater income from wage than from agriculture Average interest costs are less than 1% of cost of cultivation, never exceeding 3% in the country Source: NSSO 59 th Round

9 Relative costs of inputs Inputs that might not have an impact on productivity: –Labour 22%, lease rental 5%, other expenses 15% Inputs that might impact productivity –Fertilisers 23%, Irrigation 12%, Seeds 16% [Total 51% of input costs] Can increased credit significantly impact productivity?

10 Who needs Credit? Cultivators –Census data for India 31.7% - Rural 40% –Primary data from Dungarpur 25% [only BPL] –census 59% –Primary data from Dharmapuri 25% - census 39% –Primary data from W.Godavari 15% - census 12% Backward regions have more cultivators –Financing subsistence agriculture is actually financing food security. –How are these loans serviced? Is there something else out there?

11 Agricultural Productivity: Other Issues Changing technology – deskilling of farmer Inputs moving out of farmer control –Seeds moving towards research intesity –Research and Extension services moving from public to private space –Pesticides being peddled as extended service of extension –No comprehensive risk mitigation products –Downside risks are unlimited, upside benefits seem to have a ceiling

12 Rural Credit: Beyond Agriculture DetailCultivators Agricultural Labourers Household Industry workers Other Worker s Total workers (Main+ Marginal) Rural Persons40%33%4%23%100% Males42%27%3%27%100% Females 36%43%5%15%100% Supply side interventions: IRDP, SGSY, other self employment schemes Microfinance: Supply side as it is design induced Microfinance: Does not sufficiently address diverse livelihood opportunities

13 Strategies for making Rural Credit Productive Reduce VulnerabilityVulnerability –Understand pressure points [Anirudh Krishna] –RCL of Velugu Project –Maturing of SHGs [Alwer] –Diversification of livelihoods [Dharmapuri]

14 Strategies for making Rural Credit Productive Increase opportunities through response to demand side patterns [better targeting] –Understand demand induced product attributes attributes –Understand the space in which each player operatesspace –Provide effective competition in these spaces

15 Desirable policy [non] interventions Recognise that there are no easy-quickfix solutions Initiate exercise to understand the cost of delivering rural financial service products in a scientific manner –possibly examine activity based costing Remove formal and informal interest rate caps Allow banks to exploit rural areas – they would be better than the current alternatives Leave operational decisions like settlements, rescheduling and write offs as commercial decisions of the institutions Continue to remove bottlenecks for microfinance to flourish Continue to direct branch licencing towards rural areas Continue to provide targets for rural lending

16 Thanks

17 The SEWA Framework

18 Product Attributes Preference of Households on Attributes of Loan Products [HHs surveyed 1616] Attributes for various agencies Scores for attributes: 1= Very Important, 5= Irrelevant 12345Total Banks/Co-operatives Easy Access Cost of loan SHG Easy Access Cost of loan Moneylender Easy Access Cost of loan

19 Purpose-Source Mapping Pecking Order of Savings/Loan Outlets and Purpose of Savings/Borrowings InformalFormal Cash Stashed/ Informal Semi Formal – Money Lenders Traders SHGs/ Semi formal Neighbourhood institutions – Co- ops/ Post offices Outsiders – Banks, companies, chit funds, NBFCs Emergen cy and health needs Consumpt ion, social consumpt ion, asset purchase Consumption, social consumption, asset purchase, Education Withdrawal for social consumption, borrowing for Working capital, asset purchase Largely asset purchase, including assets that result in private capital formation


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